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I want to hear your thoughts about these two. I feel like too many confuse the two since Immersion requires you to feel like you are IN the game while Spatial Presence makes you feel like you are PART of the game. I'm not sure how people feel like they are IN the game while still holding a controller. So many of my friends say that they feel immersed in the game but I don't see how they can feel that way if they are holding a controller in their game and can clearly see health bars or quests on the main screen.

The two are very simple to differentiate, I think - immersion is psychological while spatial presence is somatic. I can identify with the main character of a game and feel like I'm a part of the game world, which means that the game immerses me in a psychological sense. Spatial presence is more of a VR thing, for instance when people turn their heads away during the guillotine demo of Oculus Rift. Spatial presence is the sensation of relating oneself to other objects around you in space, it refers to the physical world. As for which one is "better", I think immersion trumps spatial presence in video games, but that's just me.

Never heard of 'spatial presence' before, but if I go by how it's explained (thanx, foxi) I would say that it pretty much boils down to 'having good controls'. If a game has good controls, you pretty much forget you're holding a controller to begin with. You're no longer clicking buttons or moving a mouse, but moving your character through the game world and/or doing the actions available to you without giving it a conscious thought.
Since most modern games manage to do this, it's best to give an example that breaks this. Like Ethan: Meteor hunter (an indie game I recently picked up in a bundle). That game is a platformer, but every so often the running/jumping is interrupted when you have to freeze time and have to stack wooden platform in a different order. Not only does this instantly kill any flow, but the required precision (pixel-like) make it so you have to be more aware of your surroundings than necessary. Which is even worse when you attempt to play it on a game controller.

Immersion is indeed where you identify with whom you're playing rather than as an overseer controlling things (I don't blatantly copy-paste your definitions because simulator games and puzzle games not always have a main protagonist). You buy into the world or concept.
At first, I thought that immersion couldn't be done without having spatial presence (that the latter is a requirement for the former, so to say). But 'Brothers: a tale of two sons' sort of proved that. The controls aren't bad but totally different than you're used to, so most of the game you are aware of the controllers being there. Still...the overall game is so strong that immersion really works.